Monday, March 9, 2015

For many investors, there is no clear conviction as to how they should invest. Today's investments are guided by what was read or heard yesterday, and the popular media is constantly churning out new and different ideas. Granted it makes for some "interesting" reads, but it certainty is no way to run a portfolio.
After the financial crisis, many "experts" questioned if stocks should be the main portion of your investment portfolio. Some looked to bonds after their meteoric rise as interest rates fell. While others foresaw an apocalypse, with gold as your only safe place for your investment dollars. In the end, you could find support for virtually anything you wanted to do. With the benefit of hindsight, we can see that stocks have done quite well since 2009.

Investing With Conviction

If you invest without conviction, it is a recipe for disaster. Time has shown that emotion is an investor's worse enemy. To paraphrase Warren Buffett, emotion will make you greedy when you should be fearful and fearful when you should be greedy. So how do you overcome this?

An asset allocation model was designed to help investors overcome their natural instinct of doing the wrong thing. The basic formula for success in the market is buy low and sell high. An asset allocation model helps you achieve this goal. When a segment declines, you have two choices to get your allocation back in line, buy more of what declined (buy low) or sell what didn't (sell high). But to do this, and go against your emotions, requires a belief in your asset allocation and your investing process.

Herein lies the problem. Many investors don't have a process, an allocation and thus, have no conviction. They read an article where something has been very successful, then follow it until it loses money, at which point they sell and start the process again. This continues until they become frustrated and pull out of the market. They will later reenter the market when it appears that 'everyone is making money.'

A Dividend Growth Stock Conviction

My conviction is dividend growth stocks. I have researched and found it to be successful over long periods of time and in many types of markets. Also, dividend growth stocks provide you positive feedback each time one pays or raises its dividend.

Below are several bellwether stocks that are found in most hard-core dividend growth stock portfolios, and have increased their dividends for decades:

PepsiCo, Inc. (PEP) is a major international producer of branded beverage and snack food products. The company has paid a cash dividend to shareholders every year since 1952 and has increased its dividend payments for 42 consecutive years. See full analysis here. Yield: 2.6%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 52 consecutive years. Yield: 2.7%

Kimberly Clark Corp. (KMB) is a global consumer products company producing tissue, personal care and health care brands include Huggies, Pull-Ups, Kotex, Depend, Kleenex, and Scott. The company has paid a cash dividend to shareholders every year since 1935 and has increased its dividend payments for 42 consecutive years. Yield: 3.2%

Emerson Electric Co. (EMR) designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial and consumer markets around the world. The company has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 59 consecutive years. Yield: 3.2%

McDonald's Corporation (MCD) is the largest fast-food restaurant company in the world, with about 35,000 restaurants in 119 countries. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 37 consecutive years. Yield: 3.4%

I am so confident in my process that I gleefully welcome downturns as buying opportunities. Let the others flee to whatever the pundits are recommending this week, a scared market provides cheaper stocks. To be a long-term bear in U.S. equities, one must believe the underlying companies are flawed. And if that is the case, which I do not believe, then the U.S. and the world economies have bigger problems than the equity markets.